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Michigan court denies transfer tax exemption to Fannie Mae & Freddie Mac: a sweet result for Michigan that could cost the feds millions

While those with a sweet tooth may think of Fannie May as the Chicago-based chocolate company, Fannie Mae has only brought heartburn to Michigan as Fannie and Freddie Mac claimed a federal exemption from the Michigan real estate transfer tax as to the sale of foreclosed properties – costing Michigan millions of dollars in lost tax revenues. Michigan challenged the validity of these claimed exemptions, and a recent federal District Court decision, Oakland County v. Federal Housing Finance Agency, produced a sweet result in its favor – holding that Fannie and Freddie are not exempt from the type of taxation imposed by the Michigan real estate transfer tax.

In Michigan, as in most states, when real estate is transferred, a transfer tax (based on the value of the property) is imposed on the transaction. Fannie and Freddie (as well as the Federal Housing Finance Agency (FHFA) as conservator) routinely claimed a federal exemption from the Michigan tax because their federal charters exempted them from “all taxation” imposed by any state or county. Oakland County filed suit against Fannie and Freddie, asserting that this claim of exemption from state transfer tax was erroneous because the Michigan transfer tax is not the type of tax intended to be covered by the federal exemption. And the federal District Court agreed!

In its analysis, the court considered the intended scope of the federal exemption. Although the federal charters of Fannie Mae and Freddie Mac provide for an exemption from all “taxation” by states and counties, the court determined that this exemption applied only to “direct” taxes, and not excise taxes. Because, per Michigan law, the real estate transfer tax is an excise tax levied on the conveyance of property – and not a direct tax – the court concluded that the federal exemption granted to Fannie and Freddie in the charters did not apply to the transfer taxes.

The court also rejected an argument that the Feds didn’t even make. Oakland County sought a ruling on whether Fannie and Freddie were exempt from the transfer tax as federal instrumentalities under a Michigan statute. The Feds argued that the court need not address the issue, because they were exempt under the federal exemption. The court, however, citing a recent federal court decision from the District of Nevada (Nevada v. Countrywide Home Loans), held that Fannie and Freddie are not exempt under the Michigan law either, because they are not federal instrumentalities.

Given the tremendous number of sales of foreclosed properties by Fannie and Freddie nationwide, this decision has implications well beyond a single state. Michigan is only one of many states plagued by the foreclosure crisis and is desperately in need of tax revenues to balance stressed budgets; according to RealtyTrac, nationally there were foreclosure filings on almost 2 million properties in 2011. This decision is likely to grow legs as state and local governments around the country realize their potential to realize on the transfer tax.